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Revise Oregon's tax system in stages: Guest opinion

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Oregon's property tax law is so complicated the Deschutes County assessor's office developed an informational video where the Property Tax Fairy walks viewers through the laws intricacies.
(Deschutes County assessor)

Oregon reporter Christian Gaston’s conclusion that Oregon’s tax system "is a cobbled-together mess” is not disputable. Gov. John Kitzhaber apparently proposes to review and revise the entire system in a single stroke. Instead, consider doing it in steps. Fix the parts that stick out like sore thumbs. Leave the rest for resolution after the dust settles. Such an approach is more likely to succeed than trying to do it all at once.

A Good Tax System

Any tax needs to raise sufficient revenue to meet the service needs and objectives of the government. Beyond that, a good tax system should: (1) be fair, (2) encourage and attract investment that will grow the economic base while protecting livabilty, the environment and education, and (3) have a broad base so that all who enjoy Oregon’s benefits contribute.

Income Tax

Oregon has one of the three highest state income taxes in the United States. Fair? Attractive for investment? Whether a tax is progressive is a measure of fairness: whether taxpayers who are best able to pay in fact do pay.

The federal income tax has seven brackets, from 10 percent to almost 40 percent. Oregon has only four brackets from 5 percent to near 10 percent. For a joint return Oregonians hit the highest rate around $16,000 of taxable income. For some low income Oregonians, the Oregon income tax is close to their federal tax. In the lowest brackets, it may exceed the federal tax.

Oregon taxes long term capital gains as if they were ordinary income. Federal tax law taxes them at roughly half the ordinary income tax rate. Oregon’s approach will not lure investment. Note that almost all large cap companies have taken their head offices elsewhere.

Accordingly, the place to start any fix of the tax system is (1) to reduce the tax rates on ordinary income and capital gains and (2) to increase the number of tax rate brackets.

Assuming this is the appropriate starting point, how best to make up the loss of revenue?

Sales Tax

The quick answer, of course, is a sales tax. Oregon has historically rejected such a tax because: (1) taxpayers hate the idea of another tax, and (2) some believe that such a tax is not progressive.

A sales tax is not new to Oregon. We already have such taxes on gasoline, cigarettes, beer and wine, hotel occupancy and timber severance. Washington County taxes real estate transfers. The city of Ashland taxes food and beverages sales.

Reducing the income tax will enhance the Oregon economy. In the long run, if spending is contained, the overall tax burden may well decline.

Some believe a sales tax is not progessive. That depends on what is taxed and at what rate. With exemptions for groceries, infant clothing and similar goods, a big share of this tax will be paid by those most able to pay.

This tax accounts for a relatively small percentage of tax revenues. Recently, an ill-advised attempt was made to eliminate this tax. It is a tax that can be fixed without eliminating it.

The exemption of $1 million contrasts with the federal exemption, over $5 million, and is less than all other states in the west, many of which do not tax estates at all. The estate tax currently includes the value of a personal residence and a vacation home. Thus, the estate tax is in part a tax on home ownership,

At the very least, the value of a decedent’s principal residence should be excluded from a decedent’s gross estate, and the exemption should be raised to a minimum of $2.5 million.

Conclusion

Making these revisions is important to Oregon’s future. Doing it in steps is most likely to succeed and will put Oregon on the way to a good tax system.